In the Market Place - Traded Options

Contents

Options are traded in contracts, not as individual derivative units. Each contract represents a certain number units of the underlying asset. This number is different for
different types of asset worldwide.

Therefore, when you see a US Equity call option price of, say, $1.45, you will have to pay $1.45 * 100 for just 1 contract. 1 contract is the minimum amount you can trade and for US
Equity Options 1 contract represents 100 individual shares.

The following table outlines the amount of underlying securities that represent 1 contract for a few different markets where options are traded on an exchange:

Underlying Asset

Units per Options Contract

US Equities

100 shares

S&P Futures

250 units

UK Equities

1,000 shares

Therefore, when you trade a Covered Call you are only "covered" if you are trading the same number of units on each leg of the trade.

For Example:

If you are wanting to sell 3 contracts of MSFT $80 strike calls at $3.50, you will receive a premium (before commissions) of $1,050. But you will need to buy 300 MSFT shares in order to be
"covered". This will be at a cost of 300 * the MSFT share price.

Margin is the mechanism by which you can borrow funds from your broker account but you are required to cover your potential risk liability with liquid assets in your account. This is
particularly relevant to those traders who sell short, sell naked or trade net credit spreads.

When you sell short, sell naked or trade a net credit spread, whilst money is deposited into your account, there is still (in most cases) a contingent liability risk which must be covered
by sufficient funds in your account.

These funds can either be represented in cash or "marginable securities". A marginable security is defined as an asset which is deemed by the brokerage to be secure enough to stand as
collateral against your risk on the trade. A stock like MSFT may well be considered as a marginable security, whilst low priced stocks (under $10) with little trading history, low
trading volumes, poor liquidity and high volatility may not be considered as acceptable collateral.

Remember that in many cases of selling short and selling naked, your potential risk liability may be unlimited (or at least substantial). Using the Strategy Analyzers to
determine your risk profile will help you to identify those situations where your risk potential is unacceptably high, depending on your own personal appetite for risk.

Trades can be placed either online of offline, depending on your broker account.

Use the Strategy Guides to assist you in placing your spread orders over the telephone quickly, efficiently and accurately. By
knowing what to say and how to say it clearly, concisely and correctly you will help save both your time, the broker's time and ensure that there are no misunderstandings.

Make sure you fill in the right figures and have them in writing before picking up the phone to place your order. Then simply read out the order to the broker with your limit order
prices.

Because options prices are not always "clean", it is preferable to place a Limit Order, particularly on spreads. This will ensure that you will be filled at your specified price or
not at all. By using the Limit Order function you can overwrite the market prices in order to base your calculations on your
preferred limit order on any strategy and then see the results of your limit order risk profile.

The most important things you need to know about any trade you ever do are:

Your maximum risk on the trade

Your maximum reward on the trade

Your breakeven point(s)

The Strategy Analyzers give you these crucial figures in both nominal and actual formats for over 60 different strategies.

In addition, you also should know in advance:

The maximum loss you will accept and when to get out of a loss making trade

When to take your profits

These are crucial money management criteria, which you must determine in your own mind before you start trading. There are wide parameters concerning money management techniques and much
depends on your own appetite and respect for risk. Just keep in mind that it is generally a good thing to cut your losses short and to let your profits run.

Many people believe that 90% of options expire worthless (ie no Intrinsic Value at expiration). Figures from the CBOE indicate that in fact only 30% of actively options expire worthless
in each monthly cycle.

Only 10% of options are exercised during each monthly cycle. Usually this happens in the final week before the expiration date. (CBOE)

Over 60% of all options positions are closed out in the market before expiration. In other words option buyers sell to close their positions and option writers (sellers) buy back to close
their positions. (CBOE)

the OCC randomly chooses a brokerage firm with the appropriate short options in the same class and series

the brokerage firm randomly calls one of its customers with the relevant short options position and delivers an Assignment Notice informing them that the option owner has exercised their
right to buy (call) or sell (put)

Option Symbols

Options have ticker symbols just like stocks do. The symbol accurately identifies the
underlying, the expiration month, the strike price, and the type of option.

A series of letters identify the option. They appear in the order of Root, Expiration month,
and Strike price. The letter that is used for expiration month is also used to identify
whether the option is a call or a put.

The first letter or group of letters (up to 3) identify the underlying and is called
the root. It is not the same as the stock symbol, although it can be. Microsoft has
the stock symbol of MSFT. But since that's more than 3 letters, a root symbol is
devised by the standardizing authority and a group of 3 letters is used.
MSQ is the primary root for Microsoft. There can be others under certain
conditions, but for now let's keep it simple. The root for Microsoft is MSQ.

The next to the last letter in an option symbol indicates the expiration month.
If the option is a call then the first half of the alphabet is used. If the option
is a put then the last half of the alphabet is used. The table below illustrates the codes.

Expiration Month Codes

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Calls

A

B

C

D

E

F

G

H

I

J

K

L

Puts

M

N

O

P

Q

R

S

T

U

V

W

X

The last letter of the option symbol indicates the strike price. Again there are codes
to decipher the strike price.

Strike Price Codes

A

B

C

D

E

F

G

H

I

J

K

L

M

5

10

15

20

25

30

35

40

45

50

55

60

65

105

110

115

120

125

130

135

140

145

150

155

160

65

205

210

215

220

225

230

235

240

245

250

255

260

265

305

310

315

320

325

330

335

340

345

350

355

360

365

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

70

75

80

85

90

95

100

7.50

12.50

17.50

22.50

27.50

32.50

170

175

180

185

190

195

200

37.50

42.50

47.50

52.50

57.50

62.50

270

275

280

285

290

295

300

67.50

72.50

77.50

82.50

87.50

92.50

370

375

380

385

390

395

400

97.50

102.50

107.50

112.50

117.50

122.50

By using the above information we can decipher the option symbol MSQLM:

The MSQ is the Root identifying Microsoft, the "L" is for the month of December and it
also let's us know that the option is a call option.

The last letter "M" tells us the option is for the 65 strike price.

Don't worry about remembering or memorizing all the codes. They are readily available
and easily obtained when you need them.

One more example, let's examine the option symbol CAH:

The last letter tells us the strike. You have an idea where
a stock trades to know the strike. For instance, the letter "B" could be for
the strike price of 40, 140, 240, 340, etc. In this case the letter "H" is for
the strike price of 40.

The letter "A" is for the month of January and indicates a call;

And the letter "C" is the root symbol for the stock of Citicorp as well as
the stock symbol.